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Global Islamic BusinessEnvironment

DAY ONE

DATE: SAT , 10 JULY 2010TIME : 9.00 AM 5.00 PM

Even the ideal strategy is useless ,unless properly implemented. Getting the right people is the cornerstone of executing strategy .

Zimmerer and Scarborough

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What Is Globalization?

The world is moving away from self-contained nationaleconomies toward an interdependent, integrated globaleconomic system

Globalization refers to the shift toward a more integratedand interdependent world economyBorderless

Globalization has two facets:1) the globalization of markets2) the globalization of production

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The Globalization Of Markets

The globalization of markets refers to the merging of historically distinct and separate national marketsinto one huge global marketplace

In many industries, it is no longer meaningful to talkabout the German market or the American marketInstead, there is only the global marketFalling trade barriers make it easier to sellinternationallyThe tastes and preferences of consumers areconverging on some global normFirms help create the global market by offering thesame basic products worldwide

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The Globalization Of Production

The globalization of production refers to the sourcing of goods and services from locations around the globe totake advantage of national differences in the cost andquality of factors of production like land, labor, andcapital.ieNike never have a factory

Companies compete more effectively by lowering their

overall cost structure or improving the quality or functionality of their product offering

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The Emergence Of Global Institutions

Institutions are needed to:help manage, regulate, and police the globalmarketplace

promote the establishment of multinational treaties togovern the global business system

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Institutions created over the past half century include:

the General Agreement on Tariffs and Trade (GATT)the World Trade Organization (WTO)the International Monetary Fund (IMF)the World Bank

the United Nations (UN

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The World Trade Organization (like its predecessor GATT) is primarily responsible for policing the worldtrading system and making sure that nation-statesadhere to the rules laid down in trade treaties signed byWTO members

In 2007, the 150 nations that accounted for 97% of worldtrade were WTO members

The WTO promotes lower barriers to trade andinvestment

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The Emergence Of Global InstitutionsThe International Monetary Fund and the World Bank werecreated in 1944The IMF was established to maintain order in theinternational monetary system

The World Bank was established to promote economicdevelopment

The United Nations was established in 1945 to:

maintain international peace and securitydevelop friendly relations among nationscooperate in solving international problems and inpromoting respect for human rights

be a center for harmonizing the actions of nations

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Global Business Strategy

Global Business Strategy can be defined as the businessstrategies engaged by the businesses, companies or firms operating in a global business environment andserving consumers throughout the world.

Global business strategies are closely related to thebusiness developing strategies adopted by businesses tomeet their short and long term objectives.

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Global Business Strategy

2 types of strategies:The short term goals of the business would be related toimproving the day-to-day operations of the company

the long term objectives are generally targeted towardsincrement of the profits, sales and earnings of the companyin the long run ensuring growth and stability of the businessand dominance over the national or regional market.

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DRIVERS OF GLOBALISATION

Four drivers determine the extent and nature of globalisation inan industry:

(1) Market drivers

Degree of homogeneity of customer needsExistence global distribution networksTransferable marketing

(2) Cost drivers

Potential for economies of scaleTransportation costProduct development costsEconomies of scope

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DRIVERS OF GLOBALISATION

(3) Government driversFavour trade policies e.g. market liberalisationCompatible technical standards and common marketing

regulationsPrivatisation

(4) Competitive driversThe greater the strength of the competitive drivers thegreater the tendency for an industry to globalise

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International Business - activities that require the movement of resources,goods, services, and skills across nationalboundariesall business transactions that involve two or more

countriesInternational Trade -the export or import of goods or services toconsumers in another country

International Investment -investment of resources in business activities outsidea firms home country

International Management -the performance of the management functions(POLC) across national borders

Globalisation-Characterictics

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International Strategy Formulation

Why Globalize?expand sales

when domestic markets are saturated, should go

overseas to increase sales and profitsacquire resources

resources may be more readily available and lesscostly in other countries

diversify sources of sales and suppliesdifferent business cycles between countriesmay avoid impact of price swings or shortages

avoid tariffs

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The Changing Global Environment

In the past, managers have viewed the global sector as closedEach country or market was assumed to be isolatedfrom others

Firms did not consider global competition, exports

Todays environment is very differentManagers need to view it as an open market

Organizations buy and sell around the worldManagers need to learn to compete globally

The McGraw-Hill Companies, Inc., 2000

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The Changing Global Environment

Global organizationsorganizations that operate and compete in morethan one countryare free to establish foreign subsidiaries to becomestrong world competitors

Home Countrycountry in which the parent organization is based

Host Country

country in which the parent organization makesthe investment

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Barriers to Free Trade

Free TradeBarriers

Tariffs

EconomicCommunities

Export

Restraints

BuyNationalCampaigns Quotas

Local OwnershipRequirements

Distance

CulturalDifferences

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Barriers to International Trade

Trade Controls - governmental influences usuallyaimed at reducing the competitiveness of importedproducts or services

Tariffs: taxes levied on goods shippedinternationallySubsidies: direct payments to domestic producersQuotas: legal restrictions on the import of goods

Free trade doctrine - predicts that if each countryagrees to specialize in the production of goods that itcan produce most efficiently, it will

make the best use of global resources

result in lower prices

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Distance and Cultural Barriers

Distance and Cultural barriers also closed the globalenvironmentDistance closed the markets as far as some managerswere concernedCommunications could be difficultLanguages and cultures were different

During the last 50 years, communications andtransportation technology has dramatically improved

Jet aircraft, fiber optics, satellites have provided fast,secure communications and transportationThese have also reduced cultural differences

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Effects of Free Trade on ManagersEffects of Free Trade on Manag ers

Declining barriers have opened great opportunities for managers.Managers can not only sell goods and services but alsobuy resources and components globally.

Managers now face a more dynamic and exciting job dueto global competition.


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Economic Integration

Free Trade Area: all barriers to trade among member countries are removed, so that goods and services are freelytraded among the member countries

NAFTA (North American Free Trade Agreement)

Customs Union: barriers to trade among members aredismantled while a common trade policy with respect tononmembers is established

Common Market: no barriers to trade exists betweenmembers and a common external trade policy is in force;also, factors of production, such as labor, capital, andtechnology move freely between member countries

European Union (EU)

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Global Task EnvironmentGlobal Task Environment

Suppliers

Distributors

Customers

CompetitorsForces Yielding

Opportunitiesand Threats

Figure 4.2


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Suppliers & DistributorsSup pliers & DistributorsManagers buy products from global suppliers or make

items abroad and supply themselvesKey is to keep quality high and costs low

Global outsourcing: firms buy inputs from throughout

the worldGM might build engines in Mexico, transmissions inKorea, and seats in the U.S.Finished goods become global products

Distributors: each country often has a unique system of distribution

Managers must identify all the issues

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Customers & CompetitorsCustomers & Comp etitors

Formerly distinct national markets are merging into ahuge global market

True for both consumer and business goodsCreates large opportunities

Still, managers often must customize products to fitthe culture

McDonald's sells a local soft drink in Brazil

Global competitors present new threatsIncreases competition abroad as well as at home.

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Forces in the Global General EnvironmentForces in the Global General Environment

Political &Legal Systems

Economicsystem

SocioculturalSystem

Forces yielding

Opportunitiesand threats

Figure 4.3


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Political/Legal Environment

Different legal systems: common law or civil lawRepresentative democracies: such as the U.S.,Britain, and Canada

Citizens elect leaders who make decision for electorate.Usually has a number of safeguards such asfreedom of expression, a fair court system, regular elections, and limited terms for officialsWell-defined legal system and economic freedom

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Political/Legal Environment

Totalitarian regimes: a single political party or person monopolize power in a country

Typically do not recognize or permit oppositionDo not have most safeguards found in ademocracyDifficult to do business with given the lack of economic freedomHuman rights issues also cause managers to avoiddealing with these countries

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Economic EnvironmentEconomic Systems

Market Economyproduction and prices are dictated by supply anddemand

production of goods and services is privately ownedcompetitive marketsstrong currenciesinstitutional support

well-functioning infrastructuresinvestment opportunities for individualssocial welfare, consumer-directed, administrativelyguided

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Economic Environment

Command Economygovernment sets goals and determines the priceand quantity of what is producedmost command economies are moving away from

the command economic systemMixed Economy

certain economic sectors controlled by privatebusiness, while others are government controlled

many mixed countries are moving toward a freeenterprise system

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Economic Environment

Key Economic Issues (and indicators)economic growth, inflation, quality of life, GDP

exchange rates

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Recent TrendsRecent Trends

Current shift away from totalitarian dictators towarddemocratic regimesvery dramatic example seen in the collapse of theformer Soviet Republicalso very pronounced in Latin America and Africa

With this shift, has come a strong movement towardfree market systems

this provides great opportunities to business managers

on a global levelmany businesses are investing millions in former totalitarian countries to seize these opportunities

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Changing Political and Economic ForcesChang ing Political and Economic Forces

Russia1985

Russia1995

Democratic

PoliticalFreedom

TotalitarianChina1985

China1995

Command Market Mixed

Economic Freedom

Britain1985

Britain1995

Hungary1985

Hungary

1995

Figure 4.4


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Sociocultural ForcesSociocultural Forces

National culture: includes the values, norms,knowledge, beliefs, and other practices that unite acountry.

Values: abstract ideas about what a society believesto be good, desirable and beautiful.

Provides attitudes for democracy, truth,appropriate roles for men, and women.Usually not static but very slow to change.

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Sociocultural Forces

Norms: social rules prescribing behavior in a givensituation.

Folkways : routine social conventions including dresscodes and manners.Mores : norms that are central to functioning of society- much more significant than folkways.

examples of mores include theft, adultery, and areoften enacted into law

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Hofstedes Model of National CultureHofstedes Model of National Culture

Individualism

Low Power Distance

Achievement Oriented

Low Uncertainty Avoidance

Short TermOrientation

Collectivism

High Power Distance

Nurturing Oriented

High Uncertainty Avoidance

Long TermOrientation

Figure 4.5


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Hofstedes Modal of National Culture

Individualism/Collectivism: measured by whether or not the ties between individuals are normally loose or closePower distance: the extent to which less powerfulmembers of society accept and expect that power will bedistributed unequallyAchievement/Nurture: the extent to which societiesvalue assertiveness (achievement) or caring (nurture)

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Hofstedes Modal of National Culture

Uncertainty avoidance: refers to whether people in the society areuncomfortable with unstructured situations in which unknown or surprising incidents may occur

Long-term/Short-term: the extent to which societies have a long-term or short-term outlook on life plans

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Individualism v. CollectivismIndividualism v. CollectivismIndividualism: world view that values individual freedomand self-expression

Usually has a strong belief in personal rights and needto be judged by achievements

Collectivism: world view that values the group over theindividualwidespread in Communismprevalent in Japan as well

Managers must understand how their workers relateto this issue.

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Power DistancePower Distance

A societys acceptance of differences in the well beingof citizens due to differences in heritage, andphysical and intellectual capabilities

In high power distance societies, the gap between rich

and poor gets very wideIn low power distance societies, any gap between richand poor is reduced by taxation and welfare programs

Most western cultures (U.S., Germany, United

Kingdom) have relatively low power distance andhigh individualism.Many economically poor countries such as Panama,Malaysia have high power distance and lowindividualism.

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Achievement vs NurturingAchievement vs Nurturing

Achievement oriented societies valueassertiveness, performance, and success

the society is results-oriented

Nurturing-oriented societies value quality of life,personal relationships, and service

The U. S. and Japan are achievement-oriented whileSweden, Denmark are more nurturing-oriented.

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Uncertainty AvoidanceUncertainty Avoidance

Societies and people differ on their willingness to takeon risk.

Low uncertainty avoidance cultures (U.S., Hong Kong),value diversity, and tolerate differences

tolerate a wide range of opinions and beliefs

High uncertainty avoidance cultures (Japan andFrance) are more rigid and do not tolerate people acting

differentlyhigh conformity to norms is expected

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Long Term OutlookLong Term Outlook

Long-term outlook is based on values of saving, andpersistence

Taiwan and Hong Kong are cultures that are long -termin outlook.

Short-term outlook seeks the maintenance of personalstability or happiness right now.

France and the U. S. are examples of this approach.

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Hofstedes Cultural DimensionsINDIVIDUALISM/ POWER UNCERTAINTY

COUNTRY COLLECTIVISM DISTANCE AVOIDANCEAustralia Individual Small Moderate

Canada Individual Moderate Moderate/ Low

England Individual Small Low

France Individual Large High

Greece Collective Large High

Italy Individual Moderate High

Japan Collective Moderate High

Mexico Collective Large High

Singapore Collective Large Low

Sweden Individual Small Low

US Individual Small Low

Venezuela Collective Large High

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How Do Organizations Globalize?Stage One: Passive Response

Importing: firm makes products and sells abroadExporting: to foreign countries

Stage Two: Initial (Overt) EntryHiring foreign representationContracting with foreign manufacturers

Stage Three: Fully-established operationsLicensing/FranchisingForeign Direct Investment (FDI)

- Joint Ventures

- Foreign Subsidiary

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Exporting: selling abroad, either directly to targetcustomers or indirectly by retaining foreign sales agentsand distributors

Importing: selling other countries products in the homecountry, either directly to target customers or indirectlyAdv: quick and relatively inexpensive

test the waters and learn about customersDisadv: high transportation costs

tariffs and quotasdanger of poor intermediary selection

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Licensing: def : an arrangement where a firm (licensor) grants aforeign firm the right to use intangible (intellectual)property such as patents, copyrights, manufacturing

processes, or trade names for a specified period of time , usually in return for a percentage of theearnings, called royalty

Adv: small or insignificant investmentDisadv: loss of control

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Franchising: an arrangement where a parent company(franchisor) grants a foreign firm (franchisee) the right todo business in a prescribed manner. Usually involves alonger time commitment by both parties than requiredunder licensing agreements

Adv: small or insignificant investmentDisadv: loss of quality control

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Foreign Direct Investment: operations in one country that are controlled byentities in a foreign countries

acquiring control by owning more than 50 percentof the operation

turns a firm into a multinational enterprise

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Foreign Direct InvestmentStrategic Alliance:

a cooperative agreement between potential or actual competitorsan agreement between firms that is of strategicimportance to one or both firms; competitive

viabilityJoint Venture:

the participation of two or more companies jointlyin an enterprise in which each party contributes

assets, owns the entity to some degree, andshares riskWholly Owned Foreign Subsidiaries

provide for tightest controls by foreign firms

very costly but can yield high returns

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International ExpansionInternational Exp ansion

Importing

Exporting

LicensingFranchising

Joint Ventures

Strat. Alliances

Wholly-owned For.

Subsidiary

Low High Level of Foreign involvement and investment needed by a global organization

Figu r e 4. 6


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International Managerial Attitudes

Ethnocentric: the belief that the home (originating)countrys management style is superior to the host(recipient) countrys management style

companies with this type of management may dobusiness in foreign countries but their subsidiaries willbe managed by home country personnel with homemanagement style

Geocentric: ( sometimes called regiocentric management)tends to see the whole world as a single marketplace andas such employ a mix of management styles of the homecountry and host country

managers and other key personnel are selected basedon merit without regard to their country of origin

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International Managerial Attitudes

Polycentric: the philosophy that the hostcountrys management style is superior to

the home countrys style

will employ host country managers to run each

subsidiary

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The impacts of Industrial Revolution inMalaysia

The set of one stop centre to facilitate Foreign Direct Investment(FDI) ie MATRADE, MDEC, EPU2) The set up Regional Economic Corridor

ie Wilayah Pembangunan Iskandar ( WPI ), East Coast

Economic Region ( ECER ), Sabah Development Corridor ( SEDIA )etc3) Introduced technical subject to all higher Learning Institution andSet up of Technical University ie German Malaysian Institute (GMI ),MFI , SMI and UTM to ensure sufficient supply of manpower

4) Relax and flexible of skilled and semi skilled foreign workers to

address shortage of manpower

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The impacts of Industrial Revolution inMalaysia

The Introduction of Free Trade Zone ( FTZ ) ie Pasir Gudang FTZ,Prai FTZ, Klang FTZ etc2) Government undivided support on development through :

- Financial support ie EXIM Bank, Bank Pembangunan &

Industri, Labuan off-shore Financial Centre- Advisory through MITI, MATRADE, FAMA- Infrastructures support ie Penang Port, PTP, KLIA,

Enhancement on mode of transportation ( expressways )3) Tax incentives / relax on duty / trade tariff 4) Encourage technology transfer to boost up development andset up of policy like LOOK EAST POLICY5) Malaysia become Asia Economic Tiger , along with HongKong, Singapore, India , China

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